‘Although we orally think of fms a ling products and servis to consumes tho fact ita mow Se ll footer ims ot o Bol consusers. Cement producers {all coment to cones prod, who then sl copert to cotton fms; TVs Taunufcarresll Tato wars, wo thea sal hemo consumes: and 6000 “Thre are several sons why the lation Beton aanufcure and eetallet ts substantall fren fom te dec relation between Sm a the Bal consumo. Ft th fm that els wy othe consumer normally controle mort ofthe varbles that dtermineconromer demand: pecs, quality, avartsing. sales service and soon. “The sun ot ru, however for asnanulcutr wh le troogh taller are ae Inuny determinants of foal rand which all yond the manufacturers canto. Fot ‘ample leva sale servic and os! edveriaing is normally eanle by tho ‘tie in psu, the rota pice an essential determin of nal demand, i se ‘bythe rte aot the manufactrer i summary he demand fced bya manyecarer depends onthe pric et (he wholesale price and on a hos of ther fotos. mes of tnhich i doe not actly contre "Aston reson wy sling toa sealer ubetantilly Aiferent fom sling o the Bol consumer tht tales compete wih each other wheres consumers don) te parla och wales cae bout th wholesale pice thao pay the manufacturer wel the whole price pad byoter roi. Ti a0 bacause he whale Dic determines magia cet he eller margin] coat) and aac e's gus [rot ie fenton ofall marginal cost ‘2 third ton why sling Snermedit Bm is dfrnt om sling to com unt eh tha number of ntrmedite Basel, wheres tho nimbe of fal ones ng; rm that salle o the Bal consumer bas more markt power then ren 13am tone | Cuaron se ‘fim that elt othr msn fc, tre ar aes when moet ofthe mata power it onthe buyer's ie: le supemariat chins, for enuple, bie egret dre of market ‘omer wih respect to epptns "Thsn reasons jury the sopra eaten of etalon batween Ss. By ‘varia ratios" I mua zlatonebatwoen to firs fn agienon along the vale ‘hin, a inthe example above. Normally {wil fr to the caso of manulactarer sling to one or sve stale. Howaver, tha anny nthe chapter applies mre ene to cabs when an upateam frm (coment pode, our prod) sll to ‘dewnstream rm (og, concrete producer bake) "The chapter const of ree scion Pit Iconlde the posbilty of etal {nteraton between upstream and downstream fre. Nest | ase verti retnts 4a ans to achive simul results without tho need to rset to ful itagrton, Fal, examin pble policy towed vel intgraton and veritas. 13.1 VERTICAL INTEGRATION ‘considera structure consisting ofan upetaum SM) and a downer Sm (Fis ‘is twst thought of alr, wl rm M ould be the manfactre ofthe product, «8 wholeslr,o the supplier of an porn np to firm For example, could be toll elon ond a gu sation. ‘Suppose thre «demand forthe fal product sop by ven by Dip Rogudig the production chlo. tur asum themes pile structre in order to produce one uit of utp, neds one unit of input In ct, under the mas ‘factaretetritrretation tis the ight eruption inorder sll ono TV et, ‘falls most obtain acy ooe TV atom the manulsctcer Suppose that has no {oats in addition to tho whole pic, wth it pys tu supplier Fs frm M bas ‘consent magia ae “The tution i aseted i Figure 133 Wanting to make a potivn pot, the ‘whole st above magia ost; that ew > Th eta r,t opi ‘utp sch tha ts marginal ot, equal ts magia even, This eels real ‘Steinem | pic paths eget, Sr Mora variable profit qual tae A, whereas rr CREDIT Retoe avr pot oul are B.Tech rae and SEI, td ma atta Shoe" ‘Now spp ht ns M ad Rae negated rm MER with sng SMe ctmasiinng tpt Tis nr monoplt ete rm Comenedcave = tod fm ifs ara ot opti choke ie ian in inten of mal v reneteena ve0in and mango cit This connpend top lee end tl pce =? Sitesi, "i ie venta oogaon ulin, Me malo pro ql ees SSRNEEI™ + cin gue s34. Sino Cia grater thn B we concn tht me M ad incenae critermm i" thar join prot by verily itoring. The dese that, under verti! integration, tho whole piss simply «uanfr pi therefor, tha 0 impact on etal pion ‘Sennen formation, For the ron, em MR tale owt the level fp tnt maximises ttl eran toa nce mn seen Roti. ‘ne along te val chan. By contrat, nda vertical separation, frm M ats whele ‘al price above morgan cot and frm determines eta pic p based on cost {tht is ihe than heel” arial cos) ‘We sacude that: a manutcturr sts «wholesale price to verclly separate rea, thon thie oat profits are lower, end rt pice ie hghe, than under vorte! Inga. “This poblem own the dx marinas problem, provides ist jtiaton {er vere! ingen Under ert eaperton thee re two monopoly pring ec fons nfo the only contractual fatrament tat M and Mean we the wholesale frie, then two monopoly margins wil be added to marginal cot, resalingin ples {Batis grnor ban monopoly prc, Av contequance, the combined profs cf Mand R te lower than hay were nated. Eero 137 lusts thi problem nd moe ‘oon winenaizanion Yoana anras, The roars problem i nt oatmenopain wh magn ot. Suppoe Boal med sen D> 2 fom Secon 2. me kw thet opal res ge by a whch gle For the manufacture thi implies «proBt of sun tw-)a= (=e)ox Reson sronrs wrwoms? aly 9% ofthe 164 milion alvin oul inthe US ube tm ‘nt ween Dbl rc roca or nearer get ins ier ih cntent providers suche Deyo SSP Tassel aero ‘recht hy conepod os pence ‘Among the 80 bilien por Juris oe shew 4: bllonconepend to sll spars asters he). RON apa tueting Some ape ‘tv ps of vw bess tha vin In ore a coos Peters or cape n 007, Comcat pers Nees oly seedy Sin Coca tb BV i nnd. alent end Spor) weedy Tinea ‘DirectTV bat not by Dish. 3 a “ “Ths nde alows to never gusto: dni mater if ite wd cost vier evra iaaptl Te rds sg a hs ieee tat ha eo pl by cmsunr soe) hand hatter ye hor ge ed) tad a SNircaed by a dei ove ‘The manuictuers problem is donot monopole with marin cost ¢ sel Send go) Hom Sei we kaw Stop ce 6 p23 conte whan = 1 4nd 99 Te in w 8 7, gt 2 and get = Ua terms of Pott level, Aa, B=, oa =a (Check tis 1 fllowe tht verte! intpation inten tal pri CoB waiesa% inereee™ “ew meaty ‘The move industry provides an example of he llc of dle magnsiation: the 1940s und 1950s, US movie hat press were lower a theses owned by stain van US Supreme Cout decision fred the soso ll hei ther seta ‘leary tho cout judged that double margnaliatin was not the ely clean ek wl ret otha Section 133, ‘ox 13:1 provides ational vidnes, ths tinereperting he US cable TV indus. ty. When dstbutor inn) ad supliar Em fare owed by hes ‘ea ington) the pie pal by conus ewer. This is colt ‘bat vertical itgraton alleviates tho debla marginalisation problem. The evidence ‘ko suggests tat the Laid tt gives seginal spore network scared by Aistbutor (hat the Sem As produ sll by fen A Is greater under vera Integration This too comaboratas the dublemarinalisnonatet soy ax shown ta ‘Wonnacott tier nh 1 Dowssretaconreron ‘Thing get ite more complicated there mare than ‘oe downtreem fr, Fgre 132 depict th cave when an pater fr (mana {are M sls to two downstream Bs (eters) By nd Me. Lat me the wholes price pl by roaler Rnd yb tal plc, Suppose tht nM meres with eur wha impact do we expect hie have on pres? “The ft efiact we would expect « decreas nw. This cresponds othe eublomargnlizntion eft conldred vir once M aad hav a sage rt ‘meximiaton pal one of th intermediation margins, m, cuss to exis. Tha ay {hl event pls ws wed fr acaustingpurpoee but re deislon problem em [Muy no longs conser to pce mars ‘to second fc we ould enpet am Sncrase iw Fem Ml which was canomer cfm M.is now slo ava of rm MR. An ncras in ws ha an efi on frm Hs revenon, a fect hat proiouly Sem M was not taking Into account. Now thet nied toi A, am acess in Wy aio hasan fc on downstess ‘mpi: pus peur on toate p,which ina help which intra Ile ML, 1 oter word, a neraoe in 2 wy ng ral cons, seg we acased in Soton 122. ‘Finaly, when comes op: ws find conficting lots Varta inagraton eli utes double marinlsation, which nture provdes dawned pressure on py os We {ew culirin this ection. Hower, vera sezaton lsu competion senng ‘fo thet tend to path poe up When Ry cnaers an increase in prc, blenes tn increas in marin wilh «deco in mask share the bese pricing trade-off we Considered in Sation 83. Now thet isp of MLR, shoud conser an ada tind fect by incresng price end losing mat share, Rss iving My voe market ‘shore. This in Cum impish ust order ore pu nto the extent tha >. this extrait order ners the rots ofthe combined MLR,Orr wn expec the profs fi tices nd th prot of dares, Regarding consumo, we have conflicting oft guting dof dole merinlzaton |sgood, but safeningdownsteam competion ist: a pisple the not eft can go sith ay! 1 ievetaear ncentves® So lr we ascusted pricing incentives slong the vue ‘hn. nome caps Investinen! incentive ar alto important. Suppose that om comes up with anew elacuoni gadget worth to consutar, bt consumers wl oly lam aboot it ffm Raha a investment or example tng as face ol ‘he new gud) Alternatively, suppose that fm comes up wih «new ex model ‘wath fo consumers, bt prodtion i only pss i fm M makes on fvexnot (or example, designing and building a mould rogue to produce a at Suppose ‘morover tht thes investments re pele assts, concept intoduond in Seton 3. ‘he sls fre welning sony uefa for sling i M's gut ad the mould only ‘tf for aking fra seep. Lat us continue withthe maple of theca manufctrrRoutouring ato ‘manufacturer M,Prequenty ther ar many contingencies which re dill fo prdlt ‘snd write contracton lr example, hw much wil eto produ th past or bow ‘many cars wil b demanded). Accordingly, at some pat inthe fate te erat ms ‘ofthe transaction btwen Mf and will ned a be determined: wheres B's investment Aecision must be made om the gg. Then ws havea preblom, Spacifcally, suppose that the investment coats c= 5, wher he ol value ce sted by the investment is v= 8 aval whic appropriated by Br R upon sl) (lary, his i worthwil ivertment. However, once te invetnent ede i Ie sflactivey a sunk eet which in tr inde «hl prabem (ef Saton 3 up pow ha Aakash leave fro Meter p= Gp = 8. The station ls rpreened by th game in Figure 12. The only subgenepeict equleiun of {his yams (Seton 7.2) efor to olflr pt and for M to choose &. This sen na ‘cient elu: ttl pao i zuo, where the choos of «would led otal pepefof. nthe context, vata nttion may help sl the hold-up problem crested byinvestments in poi asetappoe that aciuicesM, Now decison uch ete Investnnt lavel he mumbe of part tae mad by where's nner spy xt orders. Taking the group toute, manager correct determines tat ‘he invesnent is worthwhile (it caste Sand nea baa of) and ecg! {he lient level of investment i hove. ‘vertical ntepatin salve ame problems, may eles crests new ove. Contin ung withthe same wxampla upon acquedon bythe downstream rm. M's moog is the ordar of manager As we arn Seton 3, this rater en agen problems um Ms manager wants Flin M (sow sso of MA to actin intrest bt Fi ‘my nt know exactly what a oder snce Frm M's manager ibe informed han lm Rs manager Sefer anacenin ae ‘hes investments in spoil att areas, vet intarton alleles the holdup problem bt iocreases the agency problen. 1 ral ft op pent ead xan How Tee Groaiclduswe mew er mpl wl ue tnd sn eaceca Sry fme tne Rotopod Ai thcat arin asta) i hones thm a YB ake usenet np Ths et nen opm ‘Liana 0 eb tect ge op vera enon: eens ome kt ay, he at re cnet nny whan» ico cat pc Se Fait tm oie spl vn hugh om na ee SSIETEESR hss eaety te Us ino orf wan oa SP sciner pment tt dovnious ed ose! Ta Dineen im ofereteetin roms tones fin ‘SUS ate tun by slg te maaan Sr cig es ded ogy ps at ons ind frm ffi) et one xn head ney Sd sing her evo Hoven cay macht totes eeidtee te US en no nar oval vr note ec nahn ocd ete or ay tage’ One ple thine all fh star ot Epa pers mange iy mening tno, eal op rare ep pal Tn wud hen gp te oc of te tlacy pag te lovts than eth ovever, bore dacrding stg babavore diver of vat ntgration, ‘we should noo that. even if vera! intgation not azole with intemal flows, ‘tdoes imply tho option of intra Sows. noe words, the advantage of bing vert aly integrated witha potent supplier tha force tour upp tbe mae fin and bid more egresively ar leo the bayrsrichos oth internal source 13.2 VERTICAL RESTRAINTS Inthe previous sction, we aw how vet norton may Increase ciency of pricing longa valu chain. Bu: verte integetlonrguied fe elicit ping a ‘many eases it snot inthis section, above how a vray of al ett yas dothejah. ‘= Womens peice. Suppose hat, ination odetrining« wholesale pice, te ‘ustream frm, an sta fo fn pd hy th doumaton Be, Bn ce It wants fo do any business with M. As ia Section 83, we call thu pa) &| ‘wept. ten thf foo slo called anise (though, In ft tchise tracts invalve more than jst seing a xed fe). Mor neal, tn Scion 6.3, antec of this type are an examples pring” ‘Suppose that he manatees w = cand f= nt whe w= (p"~ Dip) |e manopaly prot fr «verily inated Sem, arms of Figure 131, thie corre. ‘sponds to sulting «Sed fr equ to hears A+ C. There ae thro Pint to aoe ‘touts nonlinvar cnt: ist, fom the pot of iw of he fia th cont ficient, that, tt maa hoe ont pots, This eso becuse tho ariel cost {akan ino consideration by the reer (he whole price w) ie equ fo the te magia ost); eerdgly, the tar st pron tho optial lvl, at ithe level ha vertically ntepte sonoplis would stp. Second by pricing his wy, there recive ttl gos ras w= x" (sof he fanchise fel ere, is willing wo py up to f= =" ts «Bed fe Finally, the manufacture eter soo ‘nts of variable pref (cane it sells et marge! co!) bat i bl to rcovr all ‘monopoly pai tough the Bead ‘We ths conclude tha ‘online contracts te psu, then the optimal ston under vere separation e dent otat under verti ntti, 1 fc more general pont Ista, allowing for fined fos, the upstream f't rot maxinaton problem is essentially equivalent fo maxing fin profit the upsveam and the downstream fms, and then Sng the maximum Bx fe tat he ddownetrae Bes willing op. tm pectin wo obprve maay tndtes where naar ecg is the sul. This ons inconsistent with the abovs view tat nonlinear ping increases tt rots ‘ong the vlue chin, This sagt thatthe above result (nalinaa eng lads to ‘swoc) needs tobe qulied in sora ways Fit [assumed tht tare in0 com- peiton at ech stage there ae erverl dewastam Arms competing wns each ‘ter the theres tt cin for ee sfiet to captre monoply pris may {lt bold A second quaieston I that we ave considered the case of eomplee Snforation Ifthe uptren Sem dove not know the downsteam frm’ eo, tani ‘maybe optima to ots variable fe that seston everage marginal eos. “Sometines th numberof anufictrrs i very le with respect tt umber frelon. Ths seems especially tov of acary stor: tho Los Angels sane, for eampleher ro 15 rst of gn pe, 19 diferent kinds of mustard, nd 12 ‘ads of fon plan" Mos ofthe mata power istherfe a th retro. nate "he manafecort level Limited shell pace ean thatthe opportunity cost cf xrying fone pial product sary high. The aalyisof th previous etn woud prdit thet manufactures ot «high wholesale pice and exe fe equ to varie rots nine fed ort at beau he osling mar sow and Reed cms ee ty i (th opportunity cost fhe pace is very high the xed fo pai by the esl may etl be note nother words, fray be the manufacture hats pay the ‘ele or shelf pce in ac, ating allowances, fe ald by manufactures to ain ete patronage, re common practice inthe markets ss hasaucpnicenaoronance? Consider tho markt for consume elactonic: pesos! ‘Computers autphones, and soon. Tate are complax product for which ale efit te imports consumer gin good dol fom the sence provided at thy pont of ‘ale Now suppose tt one ruler neko large invertzent in als flot so hati ‘toe lege numberof consumers ti store and suppose hata acd ter Irae oinvesinent ia sles flo ut alla lower pic than he stra One ‘posbl outcome i tht many pion coneios casumes wil vist the Batwa to Tear about the availible procs and then visit the second sealer to puchae the fred prodct tlw peice. “hl sitaton eats an portant extemal cf Section $8.1 he vein in suteetot bythe fit tar beet both tl fn fs mos consumes are pce ‘onecius, then tho Invetnent bene mostly the second tat, who fe rides on ‘ho tone. Ab coneqoenn, th ncntvs fr nvesent neal arc quality te vey low Finally, the manalacturer sofas fom this, for al demand depends 08 (ponent on alr ert ‘sel pce malotenece (PMD the practice whereby the manufacture impose & ‘int pric on reall, provider way ou of hs ln, the minimum price Setlectvely enforced, then evry taller seks ttChat seery etal pce athe‘uniform minimum leva: nd then the fee sing problam disappears: nt sven pice ‘conttous consumers ain om purchasing fom « ferent real than the st one ‘hey visit Therefor, the beni fom incensed sale cere the ter who mh {he conesponding investeat 1 sxcwswerennroneraNDexcunsvE DEANS, Advising provide sir instance ofan intarztler externality. Suppose hat car dealer pays fr local TV advertising ‘Advertsing expenditures inrese demand, which intra bene all the env dealers selling the same car model, not at the dar who pad forthe advertising ots, That 1 tars «second dolor selling the same car inthe se ar, then part ofthe incu sles gone ott second eae. In this ct, RPM would pot not do the abo comectng the eternal, but ther vara recite ight. A speci alte stv to avard exuste leer, Thisie a votal erin whereby och tal ie ‘sigue avant tht thor rales ave no sees, Fo expla, cra factors have an exclusive daar in ach European count. The Geman Pat dal or Snntanc, rot allowed tall cas in Franca. Exclusiv teerte doth fb bec, f elo eversing campaign Is confined tts exclusive tery. thea therein longer an intersetaler eternal strates may algo occur betwen manufacture Continuing withthe car tershps example: Is often the cae that manufacturers invest esoaree in tring salespeople working in delersips. Some ofthis ning ie sec tothe manuf tures cars, but some i more general. he art of ers) If anes wert work With more than one manulctrer thea there would en nteraanfetre ext Sycpart ofthe taining investment dey ane manufacture benef thie manuf ‘ret One way of solving his extrait It impor on tales the vara esti of exlsie desing whos thor cnnot work bt with obe manufacturer. ‘orc esas such eel price maintenance, exclusive anova, and ‘exclusive dntng low upsueen and dowasteam Senso iternalize he tects (of demendsncrening investment. 13.3 PUBLIC POLICY tn the previous sections, I sggetd vray of reasons why vac Sms ‘nay want o merge of estas contracts that og ranenton Betwown pst fd downstream pajor. Ar vera marge and vert retant god for oon ‘Sumas? Should policy makers cre about it” Unlike halal merger, wharethe presumption thatthe transition lead to higher eli pias, when i comer tovertcl integration te ofc ie ambiguous. [As we sain Seton 13.1 the double marinlinaon elec gps ha pret may ect eu of vl meg bth compan song fl as thy ay neem more ee rer myo rece we Bhan pco ln logon, Which oct domi iyo Seta ncy indy pear Cease with hve: th OS and EU no IER pic apr mere priv hn the covspending hr own plier “Enero vee itp, he fl of er rests on cones wa su sng Cnner he cof User tn doin ply a aor Sau Sean mart at 00 Manon of wor ee cate EERE AEAscu ma yu ean cht yo cn alo ol choc eam Seas dan to Une, wich a he estopped up enforces Tet py trey alr: provide tl oats ih af SOUESNapioe css nt wate anh tape tae nd ily oly Uitmaryndoc in nch herr Over thn wo done or Mar sve steer tuple Epes counter nd tothe Brogan Comino wel ‘Rune canton sues ited thr on invertase wis SLE cig eo and tent ef sie ding entre: hy may Ba SSEpcsct uy so povin terete oh dominant rs ae. Tae Urn ot eur anand vegans ered enormous sometioas [einer sonscnne Mn won edn sone cn th pees ted ot ou Tecate noacome sh enbigsty of plc ley with epee vt {anit ch oxi elie “Chr eae isen yale Aina inBox hen ali sn cate pri ach str or Hi cay cone a SEN Teter ets ty cary th cote he tick EER reve toga sarin he clement en SOEETURE cs at core may lo su om vr! inten IRV has ede fea fos vn y imps ops paar 12a wfc ow concr with vrei th psy fat Corr ample easy with see wpsta nd ewno see coe St ened eau wil pr oe a pea semreaieatice sand pmo, Spyom aw ht melt pe CR Sy epoca inna al pie gt monopaiw P™ Cy tmp hl om ope pg mono Peg “eon, eta estes my fit collusion o ead to compar foreclosure, ‘to conclude the numberof offs involved in vata retions i lary (Goble ‘pupils, inverts etal, foreclosure, colluson, of). Moreover, he ‘umber of poole stings e also rary large (on or many upton ot downstsean,‘ms: linot or nonlinear contrcs; vertical Interalin or vert sparen; ivan alti varity. al hat public policy with regard to vert relations wil onlin to incorporate an inporant asey-cse comport, ‘SUMMARY ‘ifs manuficurer st wholaae price toa vclly separate ret, then he Joint pots ar lower, and rt price higher than under vertical ntepratin. » When Investments inspect ests ae at stake, ver inegraton alovites the hol-ap problem but incre the agency problem.» If online contracts ee posible, then ‘he optima soluon under vera! separation i idatcal to tht under vet at ation, «Verilrestaints such as vsl rie mntnance, exclusive fritid ‘elusive deling slow upstream and downstream frst iteralize the effets of amand-ncesinginvesinens, + Varta! restins my feist cllesion ot laa compote foreclose. Key concepts * vrtial elation «wptream fom «downstream fm + double marinlizai ‘robe «rising vals’ costs » competition sattening «specie ase hel ‘agency theory sousourcing «verte raraints «two-part arf» enchioe ee ralinar pricing sting llowencasvextenaity see price maintenance ‘elusive errories excusve dealing REVIEW AND PRACTICE EXERCISES. 1194. MeDowat's, Empirical ordance suggest tht McDonalds arate that re ‘wholly owned by the pret company charge lower pris tendo Independent fan Chise ons: How can this diferenc be explanad? 15122. Resac pice manrenact. The following industri are kaown fo practice or Ive practic’ real pce malatnsncn fron clothing consumer secon, fine {engraces nach cn, ndcate the probable motivation or RM andthe ike welfare consequences 19133. ViamonrCasrines, Vermont Castings ia manufasture of wood burn tres, ‘somewhat complex product. One of Vermont Catingrs desler one complained ebout ‘he tems ofthe lations between the mnnfictatr ad dealer ting a "ie worst Ainppoinanent i panding great del of ine with «custoer en tale sto ‘Applewood [competing tale] because of pica." Specialy the desler lamented “tha le of tres of VC stoves. to people wham ws educated end spat long oars wth Hove do you think thi problem can be raved? How would you dlend your ‘elution nan antirusveompttin policy cour? 19124, cxausweremrones re EorortaxUniok. Should he Buropen Union ot- Taw tha practic of xcave etorins nar dslrhip? Why r why no? 12235, ausive eaums m ste SES. Boor produces ar wont to impose en excli- sve dealing clase on rts. Discuss tho eicency and maka power fects ofthis rete. CHALLENGING EXERCISES. 19136 ani. Bvidnce fom the US cblo TV industry suggests thatthe likelihood that a piven natok is care by a dstrbutar ie greater whon the network ened bythe distil (ae Box 13.1, Consider th enljl of double margzalizaton In gure 181. Suppo that ther the ditlbtor mut pay a cst Fim order to cary & vn wor (hie could comarpnd othe opportunity eat of eng channel tothe Alsibtars wap, fo example tho prot lat am not big abet cary «diferent ‘hannl). Show th thr exit valve Peach thatthe datrbta wil ary the nator \tand only ft nate news. 19157, Wore. Considr the follwing highly simpli pct ofthe personal cm ptr idasty. lage number of picking Bens esesble comput systems cal Tham -compter OMe" (Original Equpment Manufacture] Each af thre Sms mat ‘ay tre mpl for soch computer ystems at it sls: (1) avast of components sw thomseler sping cmpetivly and colatively cos the computer OEM $800 a computer; (2) th Windows open system, avalabe only rom Microma. t« Price py tobe dace blow and (3) Penta microprecso, value only fom Intel ts plop, alo toe dacose belo Sine each computer yetam aque ‘ely one opening system and oe micropro, the marge coo compute to-en O2M is 500+ py +p. Assume tht compton among OEMs diver the free ‘ofa computer sytem down to marginal costo we have p= 500 y +P, Whee ‘isthe pie ofa computer system. The domand for computer stm Is given by {= 100,00, 000 ~80,000p. Mirae ithe sale supplier af the Windows ering ‘stom for perooa emputers. The marginal costo Mics of providing Windows fer one mor computers zr. Inte isthe sol supplier ofthe Patum microprocessors {or poss! computers. The marl cat nel af Pentium micoprocsor for on6 ‘more computer syst $00. (8) Sappou tht Microsoft ond Intel sltnsouly sd dependent Pres for Windows and Ponti chip, py and. What re the Nath og Tix ples, By 294 3.7Now suppoo that Microsoft and Intl sit down to negotiate an arent to elt Windows and Pentium chips ae package to computer OEMs for» pacage price of Pe (8) Wha package price would maximise Microsofts and Int combined prot ist By how much would aa apreoment between Mico snd ate Bost ‘heir combined profits? (6) Would final consumers bene rom such an ageemantbatween Mc and Inter would thoy bo harmed? What about computer OEM&? Relse your anaes to your cautions In arte and (aod explain th aco. ‘ome pscpla underying your newer 18138 Twovraer rms. Suppose tht a manufectre sll to aller by mena ‘fa two-part tariff.) « Be lo fend whole rie ». Explain the intuition ‘ofthe rel thatthe gente te doi of walle competion, he greta the opti ‘bole pro, 15139, Downsrecan Count coupermon. Consier an industry with one upaream ‘rm and downsvea rms that compet a Cournot. Show thatthe optial whele sale price sty between marginal cost nd monopoly pls. 12 1330.Assrsrecmcr ago varie mreeanion. 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